Revenue is typically generated by the provision of sales and/or services. Whereas in some financial transactions money owed is collected at the time of a purchase and/or services rendered, many transactions operate on a promise of future payment. The revenues for this latter category are typically classified as accounts receivable. Many different collection methods abound. They vary based on the circumstances of a purchase and/or service, as well as upon commonly acceptable ways to promise future payment.
A common practice employed to break down accounts receivable is to age them. Generally, accounts with a sales/transaction date less than 30 days old are classified as current. Those that are between 30 and 120 days old are classified as delinquent. Those that are older than 120 days are often written off as bad debt.
Following up on accounts receivable as they age generates transactional costs that offset revenue. Key costs associated with accounts receivable include:
1. Loss of A/R due to uncollectability of the account (complete loss of revenue) is by far the most significant cost.
2. Time value of money, loss of funds due to increased debt as a result of not having collected the revenue, typically estimated at WACC (weighted average cost of capital).
3. Cost to collect in terms of fully loaded labor and overhead.
Thus, it is economically preferable to collect revenue in accounts receivable effectively and efficiently.
Because the costs associated with collection of accounts receivable offset revenue, the emphasis often placed on collecting debt includes minimizing the costs of collection. It is typically the case that, individuals tasked with collecting revenue cannot collect all outstanding debt. As a result, a challenge in debt collection is to choose what accounts receivable to target.
A known method for selecting which accounts to target involves worklists. Typically, worklists are employed by organizations specializing in revenue recovery operations. Thus, by definition, not all factors impacting revenue recovery are considered simultaneously, leading to suboptimal use of resources.